Month: April 2019
There is another lesson from the numbers: CEOs are paid less than the value they bring to their companies. More concretely, CEOs capture only about 68–73 percent of the value they bring to their firms. For purposes of comparison, one recent estimate suggests that workers in general are paid no more than 85 percent of their marginal product on average [Isen 2012]; that difference is attributed largely to costs of searching for workers and training them to become valuable contributors. In other words, workers actually seem to be underpaid by somewhat less than CEOs are, at least when both are judged in percentage terms. Both of those are inexact estimates, but in fact these results are what economic reasoning would lead us to expect. It may be easier to bargain the CEO down below his or her marginal product a bit more, given that the talents of the CEO would be worth much less in non-CEO endeavors.
I find the most convincing estimate of the gap between pay and marginal product to be that of Lucian A. Taylor, at the Wharton School of Business. He finds that a typical major CEO captures somewhere between 44 percent and 68 percent of the value he or she brings to the firm, with the additional qualification that the CEO’s contract offers some insurance value—that is, in bad times for the firm the pay of the CEO won’t be cut in proportion, but the CEO shares to a lesser degree on the upside. That 44–68 percent is therefore a better deal for the CEOs than it may appear at first glance. Still, you won’t find credible estimates suggesting that major CEOs, taken as a group, are capturing more than 100 percent of their value added. Here too, that is what you would expect from a competitive bidding process.
Part of the accompanying footnote: For the 68–73 percent estimate, see Nguyen and Nielsen 2014; for the 44–68 percent estimate, see Taylor 2013… It is a little-known fact that the current use of high-powered financial incentives for American CEOs still has not reattained the level it held in the pre–Second World War period.
That is an excerpt from my Big Business: A Love Letter to an American Anti-Hero, due out next week.
Traveling and not traveling, this is what I do.
That is from Bernard-Henri Levy (NYT), it was preceded by this:
I do not live very differently when I travel and when I don’t, which means I do my duty. My duty is to read, to write and to fight. These are the three things that are my duty.
As economic profits grow larger, so do economic losses at the other end of the distribution. The bottom 10 percent of companies destroy as much value as the top 10 percent create, and today’s bottom-decile companies have 1.5 times more economic loss, on average, than their counterparts of 20 years ago (Exhibit 1). That means for every company that creates economic value, there is another company that destroys economic value. Yet these value-destroying companies continue to survive, holding on to their resources for increasingly longer durations and continuing to attract capital. A growing number are turning into “zombie” companies, unable to generate enough cash flow even to sustain interest payments on their debts. The impact of these economic losses goes beyond these companies’ investors, managers, and workers: it drives down the returns for healthy companies that compete for the same resources or profits.
That is from a new McKinsey study, via Marty Manley.
Toffee is the world’s first dating app for people who were privately educated…[W]hether it’s a shared interest in horse racing or rugby, Toffee users can indicate which sporting and social events they are interested in or likely to attend, to further enhance the matching logic.
The Endangered Species Act endangered some species and announcing that a fishing area will be protected in the future increases fishing now.
PNAS: Most large-scale conservation policies are anticipated or announced in advance. This risks the possibility of preemptive resource extraction before the conservation intervention goes into force. We use a high-resolution dataset of satellite-based fishing activity to show that anticipation of an impending no-take marine reserve undermines the policy by triggering an unintended race-to-fish. We study one of the world’s largest marine reserves, the Phoenix Islands Protected Area (PIPA), and find that fishers more than doubled their fishing effort once this area was earmarked for eventual protected status. The additional fishing effort resulted in an impoverished starting point for PIPA equivalent to 1.5 y of banned fishing. Extrapolating this behavior globally, we estimate that if other marine reserve announcements were to trigger similar preemptive fishing, this could temporarily increase the share of overextracted fisheries from 65% to 72%. Our findings have implications for general conservation efforts as well as the methods that scientists use to monitor and evaluate policy efficacy.
One puzzle is why there should be an increase in over-fishing? Shouldn’t a commons already be overfished to the point of zero return? One possibility is that previous steps to limit overfishing were working.
The possibility of preemptive overfishing suggests the utility of surprise protections, but that’s not always possible and the authors don’t suggest that preemptive overfishing makes protection unwise only that it has a short term cost.
Hat tip: Paul Kedrosky.
This paper examines the effect of party affiliation on an individual’s political views. To do this, we exploit the party realignment that occurred in the U.S. due to abortion becoming a more prominent and highly partisan issue over time. We show that abortion was not a highly partisan issue in 1982, but a person’s abortion views in 1982 led many to switch parties over time as the two main parties diverged in their stances on this issue. We find that voting for a given political party in 1996, due to the individual’s initial views on abortion in 1982, has a substantial effect on a person’s political, social, and economic attitudes in 1997. These findings are stronger for highly partisan political issues, and are robust to controlling for a host of personal views and characteristics in 1982 and 1997. As individuals realigned their party affiliation in accordance with their initial abortion views, their other political views followed suit.
p.s. don’t call it “tribalism,” that is something else.
Not only have those who identify on the census as Indian risen from about 200,000 in 1900 to over 2 million by 2010; another 3 million identify as Native and something else. Of this ever-increasing population, in 2010 more than 70 percent lived in urban areas, continuing the trend begun in the years after World War II. Indians are young, too: 32 percent are under age eighteen, compared with 24 percent of the overall population. On reservations, the median age is twenty-six, compared with thirty-seven for the nation at large…Between 1990 and 2000, the income of Americans Indians grew by 33 percent, and the poverty rate dropped by 7 percent. There was no marked difference in income between Indians from casino-rich tribes and those from poorer tribes without casinos. Between 1990 and 1997 the number of Indian-owned businesses grew by 84 percent. And the number of Native kids enrolled in college has doubled in the last thirty years.
That is from David Treuer, The Heartbeat of Wounded Knee: Native America from 1890 to the Present.
The funny thing is, although it is wrong to think of corporations as people, it is probably also necessary for social cohesion. If the American people are going to support business in the court of public opinion, business must to some extent have a friendly face. Otherwise politics might treat business too harshly, ultimately leading to bad consequences for American private enterprise. Furthermore, consumer loyalty to corporations, even if irrational, is part of what induces better behavior from those corporations. Companies know that if they build up a good public image and stick around with a track record of reliable service, consumers will reward them with a kind of emotional loyalty. Overall, that creates a largely positive business incentive, one that would not be present if all consumers were more aware of the somewhat more cynical truth: that corporations should be judged not as friends but as abstract, shark-like legal entities devoted to commercial profit. The more that consumers see the relationship as possibly long-term, the more loyally profit-seeking corporations will end up behaving in a long-term and socially responsible manner. Societies need their illusions in this regard, and thus it can be dangerous to fully articulate and make publicly known the entire truth about business corporations and the fundamentally dubious nature of their loyalty.
So the trick is this: the public needs to some extent to believe in corporations as people, just to keep the system running. Workers need to hold similar feelings, to maintain workplace cohesion. Yet when it comes to politics and public policy, we need to distance ourselves from such emotional and anthropomorphized attitudes. We need to stop being loyal to corporations for the sake of loyalty and friendship, and we also need to stop being disappointed in corporations all the time, as if we should be judging them by the standards we apply to individual human beings and particularly our friends. Instead, we should view companies more dispassionately, as part of an abstract legal and economic order with certain virtues and also plenty of imperfections. Unfortunately, that is not about to happen anytime soon.
That is from the final chapter of my forthcoming book Big Business: A Love Letter to an American Anti-Hero. Ah, and there is more:
One reason we like to think of corporations as our friends is that we can feel in greater control that way. I’ve already discussed just how much we rely on corporations—for our food, for our entertainment, for communicating with our friends and loved ones, and for getting around from one place to another. But for all the talk from economists about consumer sovereignty, it’s not clear how much people actually are in control at all. It’s true you can choose what to buy in the Giant, Safeway, or Whole Foods, but it’s hard to step outside the commercial network as a whole, and the nature of that network shapes so many of our choices and thus our lives.
Of course, it is impossible for customers to ponder these philosophical questions in their deepest and subtlest terms all day long, as that would consume way too much of people’s mental and emotional energies. So instead people translate their rather bizarre, non-hunter-gatherer modern commercial society into terms that their more primeval selves are familiar with. That is, people carry around a mental picture of being surrounded by people they can trust, if only salespeople, and of being in a familiar environment in which they are exercising their free will as consumers and also as workers. Given the need to get through each day, it is emotionally very hard for people to internalize emotionally the true and correct picture of those businesses as partaking in an impersonal order based on mostly selfish, profit-seeking behavior.
You can debate exactly how true or untrue our generally held picture of freedom in modern commercial society is, but I can’t help but feel that part of it is a lie. The system offers many formal properties of freedom, such as the immense choice of products and jobs, and the relative lack of imposed coercion on most of these decisions. Still, when you combine pressures for conformity, the scarcity of attention, the stresses of our personal lives, and the need for “ready quick” decision-making heuristics, it’s not exactly a life of true freedom we are living. It is (more or less) close to the freest life a society is capable of providing us, but it isn’t quite free in the metaphysical sense of actually commanding our individual destinies through the exercise of our own free will. At least some of the freedom of contemporary consumer society is an illusion, taken upon ourselves to make our lives feel bearable and to help us feel more in control—precisely because, to some extent, we are not very much in control at all.
Recommended, by your friend, namely me.
Are a Few Huge Outcomes Distorting Financial Misconduct Research? Emre Kuvvet confronts the extreme-values problem in firm penalties and other SEC enforcement outcomes against financial misconduct, and how outliers might affect research in finance, as well as policy judgment, focusing on an article in Journal of Accounting Research. Andrew Call, Nathan Sharp, and Jaron Wilde respond.
Both terrorist and public mass shooter? In 2016 Adam Lankford published a news-busting article purporting to show that during a 47-year period the United States represented 31% of worldwide public mass shooters, and claiming that the outsized U.S. percentage is a result of gun prevalence. John Lott and Carlisle Moody criticize Lankford’s terminology and methods. Lankford replies to Lott and Moody. Once the terminological disputes are clarified, the issue that emerges is: Why does the United States have an outsized number of lone-wolf mass shooters? Lott and Moody offer explanations different than Lankford’s.
Another round on right-to-carry and violent crime: Carlisle Moody and Thomas Marvell have another go at John Donohue, treating the weighting of fixed effects by population and synthetic controls. Donohue, Abhay Aneja, and Kyle Weber respond.
Tennis and loss aversion: Michał Krawczyk challenges a set of authors who read loss aversion in tennis data. Nejat Anbarci, Peren Arin, and Christina Zenker return serve.
Why Did Milton Friedman Win the Nobel Prize? James Forder and Hugo Monnery appreciate Friedman’s underappreciated early work on the complexity of stabilization policy.
Edmund Burke, liberal:
- Thoughts and Details on Scarcity: Burke’s sage reflections on market forces and government intervention.
- Edmund Burke as an Economist, by Donal Barrington (1954), republished by permission of Economica.
It is undeniable that China since the late 1950s has deployed hard and soft power in its determination to exert influence over Africa. In the Mao era this translated into enormous aid budgets. By 1975, China was throwing ‘more than’ — in Zhou Enlai’s revealingly hazy formulation — 5 per cent of its national budget into foreign aid; in fact, two years earlier it had reached 6.92 per cent. Compare this proportion with the 0.7 percent of national income that the much wealthier UK annually reserves for international aid..It thus seems certain that Mao-era china spent a greater proportion of income on foreign aid — including in Africa — than did either the US (around 1.5 per cent of the federal budget in 1977) or the USSR (0.9 per cent of GNP in 1976).
That is from Julia Lovell, Maoism: A Global History, so far my favorite book of the year. One implication of course is that One Belt, One Road isn’t as new as you might think, and that contemporary China has more in common with the Mao era — and I’m not just referring to the censorship element — than many people realize.
2. The big recent dinosaur fossil discovery: “DePalma was a scientific nobody, a Ph.D. candidate at the University of Kansas, and he said that he had found the site with no institutional backing and no collaborators.”
4. “NASA will pay people $19,000 to stay in bed for 2 months.” Autostarting video at that link, btw.
In our principles textbook, Tyler and I open our chapter on price discrimination with the following:
After months of investigation, police from Interpol swooped down on an international drug syndicate operating out of Antwerp, Belgium. The syndicate had been smuggling drugs from Kenya, Uganda and Tanzania into the port of Antwerp for distribution throughout Europe. Smuggling had netted the syndicate millions of dollars in profit. The drug being smuggled? Heroin? Cocaine? No, something more valuable, Combivir. Why was Combivir, an anti-AIDS drug, being illegally smuggled from Africa to Europe when Combivir was manufactured in Europe and could be bought there legally?
The answer is that Combivir was priced at $12.50 per pill in Europe and, much closer to cost, about 50 cents per pill in Africa. Smugglers who bought Combivir in Africa and sold it in Europe could make approximately $12 per pill, and they were smuggling millions of pills.
Instead of smuggling the drugs to Europe, it’s also possible to send the European and American patients abroad. Gilead’s Solvadi, for example, is a very effective drug used to treat hepatitis C. In the United States a course of treatment costs about about $85,000 but due to an agreement between Gilead and generic manufactures in developing countries, in Egypt, India and much of the developed world it can be had for less than $1000. In an excellent piece, Four Reasons Drugs are Expensive, of Which Two are False, Jack Scannell illustrates the battle between arbitrageurs and pharmaceutical companies:
[The price difference] raises dreams of pharmaceutical tourism: “Enjoy a 12 week Grand Tour, where you can gaze at the awesome pyramids and the inscrutable Sphinx of Giza, explore the treasures of Tutankhamen, gasp at the wonders of Luxor, while basking in the sustained virologic response you can only dream of buying in the US.” Some may dream, but Gilead got there already and put its corporate towels on the sun loungers. Egyptians must prove residency to get Sovaldi. Tourists need not apply.
To prevent resale Gilead requires ID and it labels and tracks every bottle sold abroad:
[Patient IDs] will be used to put an identifying barcode on the bottles they receive with their name and other info. Not only can the code be used to guarantee only residents of the country get the drugs…the provisions require that patients then return a bottle to get a new bottle and allows them to get only one bottle of their prescription at a time, even though allowing them to get multiple bottles could “ease the burden on patients and health providers,” MSF says.
Médecins Sans Frontières are outraged by these restrictions but, as Tyler and I explain, the alternative is no sales in developing countries or one world-price and you can be sure that if there’s one world-price that price will be the US price and not the Egyptian price.
I will be doing a Conversation with him, no associated public event. So what should I ask?
The internet gives us the technological capability to transmit digital information seamlessly over any distance. The concept of culture is more complicated, but I mean the influences and inspirations we grow up with, such as the family norms and practices of a place, the street scenes, the local architecture and cuisine, and the slang. Culture comes from both nearby and more distant sources, but the emotional vividness of face-to-face interactions means that a big part of culture is intrinsically local.
Rapid Amazon delivery, or coffee shops that look alike all around the world, stem in part from the internet. The recommendations from the smart person who works in the local bookstore, or the local Sicilian recipe that cannot be reproduced elsewhere, are examples of culture.
Since the late 1990s, the internet has become far more potent. Yet the core techniques of culture have hardly become more productive at all, unless we are talking about through the internet. The particular aspects of culture which have done well are those easily translated to the digital world, such as songs on YouTube and streaming. When people are staring at their mobile devices for so many minutes or hours a day, that has to displace something. Those who rely on face-to-face relationships to transmit their influence and authority don’t have nearly the clout they once did.
The internet gaining on culture has made the last twenty years some of the most revolutionary in history, at least in terms of the ongoing fight for mindshare, even though the physical productivity of our economy has been mediocre. People are upset by the onset of populism in world politics, but the miracle is that so much stability has reigned, relative to the scope of the underlying intellectual and what you might call “methodological” disruptions.
The traditional French intellectual class, while retrograde in siding largely with culture, understands the ongoing clash fairly well. Consistently with their core loyalties, they do not mind if the influence of the internet is stifled or even destroyed, or if the large American tech companies are collateral damage.
Many Silicon Valley CEOs are in the opposite boat. Most of their formative experiences are with the internet and typically from young ages. The cultural perspective of the French intellectuals is alien to them, and so they repeatedly do not understand why their products are not more politically popular. They find it easier to see that the actual users love both their products and their companies. Of course, for the intellectuals and culture mandarins that popularity makes the entire revolution even harder to stomach.
Donald Trump ascended to the presidency because he mastered both worlds, namely he commands idiomatic American cultural expressions and attitudes, and also he has been brilliant in his political uses of Twitter. AOC has mastered social media only, and it remains to be seen whether Kamala Harris and Joe Biden have mastered either, but probably not.
Elizabeth Warren is now leading a campaign to split up the major tech companies, but unlike the Europeans she is not putting forward culture as an intellectual alternative. Her anti-tech campaign is better understood as an offset of some of the more hostility-producing properties of the internet itself. It is no accident that the big tech companies take such a regular pounding on social media, which is well-designed to communicate negative sentiment. In this regard, the American and European anti-tech movements are not nearly as close as they might at first seem.
In the internet vs. culture debate, the internet is at some decided disadvantages. For instance, despite its losses of mindshare, culture still holds many of the traditional measures of status. Many intellectuals thus are afraid to voice the view that a lot of culture is a waste of time and we might be better off with more time spent on the internet. Furthermore, many of the responses to the tech critics focus on narrower questions of economics or the law, without realizing that what is at stake are two different visions of how human beings should think and indeed live. When that is the case, policymakers will tend to resort to their own value judgments, rather than listening to experts. For better or worse, the internet-loving generations do not yet hold most positions of political power (recall Zuckerberg’s testimony to Congress).
The internet also is good at spreading glorified but inaccurate pictures of the virtues of local culture, such as when Trump tweets about making America great again, or when nationalist populism becomes an internet-based, globalized phenomenon.
The paradox is that only those with a deep background in culture have the true capacity to defend the internet and also to understand its critics, but they are exactly the people least likely to take up that battle.